Article from Geneva Telcom Cenvention webpage
Mergers and Alliances 1995-1999
DISCLAIMER
Merger Mania as Telecoms goes Multimedia
Hardly another business sector has seen the scale of mergers and acquisitions activity as the telecommunications industry.
Barely a week goes by without news of another purchase, fusion or alliance in the sector. And the process has been going on
for some time. Observers could be forgiven for asking how much longer this corporate feeding frenzy can go on.
The current signs are that this trend may still have quite some way to go. In the present year alone there have been major
fusions between carriers - such as Qwest and US West in the USA, Vodafone and Air Touch in a transatlantic UK/US deal and
Deutsche Telekom and One-2-One within the European Union. There have also been a number of examples of partnerships
turning into fully fledged acquisitions such as the UK's Cable & Wireless and Japan's IDC, or the UK's BT buying out its
mobile operator Cellnet partner, Securicor.
And there have been unfriendly takeovers such as the largest deal to date in Europe, computer maker Olivetti's acquisition of
Telecom Italia, Italy's largest carrier with major fixed and mobile communications networks. The result of the acquisition is
that Olivetti is now Europe's third largest carrier by revenues. A remarkable fact when you consider that ten years ago it wasn't
in the carrier business at all and even a few years ago its interests were restricted to data and mobile communications. It is
also a good indicator of just how volatile the once calm (if not staid) telecommunications business has become.
If anything, in fact, the pace of change seems to be accelerating and the scale getting larger. The value of the organisations
produced by this year's mergers so far is in excess of a quarter of a trillion US dollars, larger than many countries' gross
domestic product.
So what is driving this merger and acquisitions mania? The answer is a number of factors. But they do all have one unifying
cause - the creation
of a global information society. Observers perceive a quantum shift in the worlds' economies from a manufacturing and
industrial base to a knowledge and information business base. Whole industries - such as banking and mail-order retailing -
are going on-line. And the infrastructure underlying this new information society is the world's telecommunications network.
The size of the change is comparable to that of the industrial revolution of the 18th and 19th centuries. Only the pace seems
to be much faster this time. Mobile phones have been more or less doubling their numbers every year since cellular radio
was introduced in the early 1980s. And the number of Internet users is following a similar path - doubling every six months.
Soon there will likely be more mobile phones than fixed phones and the Internet will follow voice traffic in going mobile.
Many of the alliances are designed in some way or other either to cushion the effects of this change or to exploit it. Former
telecommunications monopoly holders are banding together in order to protect their interests at home from relative
newcomers. At the same time they are backing other newcomers in countries where they had previously had no presence.
The newcomers themselves are going through various sort-outs so that they may be better equipped to take on former
monopoly holders. And those hoping to build global networks are buying up capacity wherever they can.
At the same time manufacturers are banding together in alliances designed to quickly establish new technologies to both
enable and exploit the rush towards the information society. Sometimes manufacturers from different industrial and
technological heritages get together to exploit the convergence of their industries and technologies. And yet others acquire
smaller companies just to get their hands on what they perceive as the key technologies for the information society. The
intense competition that this new environment is fuelling often results in mergers or alliances between the giants themselves.
The first of the latter happened as long ago as 1984 when IBM, the US computer giant, bought Rolm, a pioneer of digital
office telecommunications system technology. IBM already was an established office telecommunications system technology
pioneer (it created the world's first electronic telephone exchange long before any of the formal telecommunications
equipment makers) before it went for Rolm. But it hoped Rolm would give it not just extra know-how but also an 'in' to the
telecommunications industry for the marketing of its products.
In the event, cultural differences between the two organisations proved harder to overcome than had been expected – a
phenomenon which was to be repeated many times over the following years, especially when it came to alliances across
different industries.
AT&T, the huge US telecommunications carrier, found similar problems when in the mid 1980s it allied itself with Italy's
Olivetti, the computer and office equipment maker. After a few years the two went their separate ways. But an alliance
AT&T's manufacturing arm had struck at around the same time with the telecommunications equipment making arm of
Dutch electronics giant Philips was more successful, eventually evolving into the global telecommunications equipment and
semiconductor maker Lucent Technologies. On the other hand a subsequent purchase of computer maker NCR also ran into
trouble, culminating with the spinning off of NCR again.
The US owned but Europe-based ITT and France's CIT Alcatel yielded Alcatel NV, a giant amongst the giants. Germany's
Siemens joined forces with the UK's GEC and Plessey with GPT. The other big UK telecommunications manufacturer STC -
a former offshoot of ITT - had decided to make its own attempt at a convergent alliance when it bought computer maker ICL
in 1985. But this proved too hard to manage and STC was bought by Canada's Northern Telecom, which then in turn went
on to merge with France's Matra to create Nortel. ICL, in its turn, was then spun out again and acquired by Japan's Fujitsu.
While Olivetti's acquisition of Telecom Italia earlier this year was an example of a manufacturer acquiring a carrier (although
in today's fast moving telecommunications world terms such as manufacturer and carrier are arguably outdated), there have
also been examples of carriers acquiring manufacturers. BT, for example, bought Mitel in 1985, although the alliance
floundered and BT sold the company in 1990. Carriers have on the whole looked to mergers and acquisitions with other
carriers to fulfil their business objectives.
At around the same time BT, for example, bought ITT Dialcom, the electronic messaging arm of ITT. This eventually
evolved into what became BT's Global Network Systems business. BT also set up a joint venture with Securicor to create
Cellnet, the UK's second largest mobile phone network operator. This alliance has only just come to an end with the
purchase by BT of Securicor's 40% stake.
Meanwhile Deutsche Telekom has bought Cellnet rival and former Cable & Wireless operating unit One-2-One. This
followed Deutsche Telekom's earlier purchase of a minority stake in UK long distance fixed network carrier Energis.
All of the above could be classed as aggressive alliances. There have also been some protective ones, however. In Europe a
number of major alliances have been struck between national operators.
Unisource is the name of the alliance originally struck between PTT Telecom of the Netherlands and Telia of Sweden, with
the Swiss PTT and Spain's Telefonica joining later. It has since run into difficulties. BT worked hard to produce an alliance
with Deutsche Telekom but the effort fell apart when the latter insisted on the adding of France Telecom to the alliance as
an equal partner. Instead an alliance between Deutsche Telekom and France Telecom came about - Atlas - with BT left to
find its partners elsewhere.
The Atlas alliance was successful for a few years - which included the taking of stakes in each other's companies, the
acquisition of major stakes in US long distance carrier Sprint and the setting up of Global One, a one stop shopping global
carrier for business customers. But it too has run into difficulties. Deutsche Telekom's attempt to buy Telecom Italia (it had all
but concluded the deal before it was ousted by Olivetti) earlier this year led to a falling out with France Telecom leaving the
future of Atlas and the two companies' participation in Global One and their stake in Sprint in doubt.
The Atlas-Sprint alliance was in part a response to BT's move to team up with US long distance carrier MCI. This also proved
to be a particularly painful experience for BT, although the pain came more in a sudden rush rather than being long and
drawn out. BT had struck a deal in principle and got almost all the way through the regulatory hurdles to merge with MCI - it
had even swapped key staff - when US newcomer Worldcom snapped up MCI from under BT's nose.
The high price investors were willing to pay for Worldcom shares was a factor BT had not reckoned with. Perhaps more
worrying for the status quo everywhere, it may have been an indicator that the old order of market dominance by the former
monopoly holders had truly come to an abrupt end. BT's scope for response, however, was limited. It sought the relative
safety of an alliance with AT&T.
In fact, it has been the newcomers which have been making much of the running in recent alliances.
Earlier this year UK mobile network operator Vodafone bought West Coast mobile network operator Airtouch - formerly the
mobile arm of regional carrier Pacific Telesis - to create the largest mobile network operator in the world. Perhaps more
significantly, however, the deal also made it the largest telecommunications company in the UK by capitalisation. This must
have come as a blow to the ego of BT, the former national carrier which was for a time the largest telecommunications
operator in Europe by capitalisation.
Transatlantic alliances are by no means exclusive to the northern parts of the two continents, however. Spain's Telefonica,
for example, has pursued a very successful policy of investing in and acquiring network operators in South America, notably
in Argentina and in Chile. And there have also been European-African alliances - France Telecom and Sonatel in Senegal,
for example. And European Asian alliances - such as Cable and Wireless and IDC in Japan.
As the scale of the impact on telecommunications of two great technology trends - mobile and Internet - becomes clear,
there have also been a number of alliances designed to direct and speed up the introduction of new technologies. Ericsson,
Motorola and Nokia, for example, have been at the heart of a number of technology alliances which they hope will shape
the future of mobile communications. These can vary in format from loose partnerships to joint ventures.
The grand daddy of all these was of course GSM - which embraced many more companies than just the three mentioned
above. But all or some of the three have been key in the creation of Bluetooth (a wireless interface designed to bring
wireless connectivity off of the streets and indoors), Symbian (an operating system and user interface for future generations of
mobile terminals) and WAP (the Wireless Access Protocol, a means of connecting the worlds of mobile communications and
the Internet). In a parallel move in the USA computer giant Microsoft and CDMA mobile communications pioneer
Qualcomm have also teamed up to find ways of linking the worlds of mobile communications and Internet.
Technology know-how has also been behind a set of alliances between telecoms manufacturers and Internet equipment
makers. Last year Nortel acquired Bay Networks and Lucent joined up with Ascend Communications. There were also a
number of lesser deals along similar lines by other companies. And many more are expected. The telecommunications
world is waiting with baited breath to see who, if anyone, captures Internet giant Cisco as its prize - or perhaps which
telecommunications equipment maker Cisco will capture.
There is no sign of a let-up in merger and acquisition activity in the telecommunications and related industries. As the world
progresses towards an Information Society, ownership of the telecommunications infrastructure is being seen as an
increasingly valuable asset. And at the same time manufacturers are being seen as profiting from investments in that
infrastructure so they also make appealing targets to investors.
Technology or know-how acquisitions are likely to remain prominent over the next few years, as might rationalisation of
equipment suppliers and convergence alliances. There could even be combinations of all three as outsiders such as
Microsoft use the power of their purses to become major league insiders – as indeed it is already doing as it consolidates its
position in Europe's nascent cable market. There are also likely to be more mergers and acquisitions among carriers –
Telecom Italia came very close to being acquired by Deutsche Telekom.
In fact the only thing which looks likely to rival mergers and acquisition activity in telecommunications is the rate of creation
of new telecommunications companies. As fast as the old names may disappear, new ones will be created. In fact, the
overall number of companies in the sector will most probably go up, rather than down.
The past few years have shown that mergers and acquisitions are easier on paper than in practice. The number of
unsuccessful - or less successful than hoped for - alliances easily outnumbers the successful ones. But the mere fact that there
have been successful ones shows that mergers and alliances can be made to work. They just require the most careful of
planning, meticulous execution and a lot of luck. These are exciting times indeed in the telecommunications industry.
For further information, please contact the TELECOM 99 + INTERACTIVE 99 Secretariat at +41 22 730 6161
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